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Oct 11, 2016

Are you a Guardian, Adventurer, Celebrity, Individualist…or Just an Investor in Denial?

Which of the following best describes you and your approach towards money and investing?

You are very careful with your money. From the hard work you have put in over the years and the disciplined savings you have made, you have amassed an egg nest for retirement and you are bent on protecting it in every way possible.

When it comes to investing, you have no interest in volatility or excitement. Your preferred ‘investment’ is a fixed deposit account, and you are constantly on the lookout for the best rates from the banks. The financial markets put you off because you have heard too many stories of people losing too much money, and in some cases, even their entire life savings.

If you are the above, you are a Guardian.

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You are always on the lookout for the next Facebook or Google stock. You dream of catching that one investment opportunity that will make you rich beyond words. When a good investment opportunity presents itself, you will not hesitate to make a big big bet on it.

You are confident of your own investment abilities, and you believe you can hold your own against the professionals whom you think are just out to rip you off. When asked to choose between slow and steady gains and the chance of a huge windfall, there is no question that you will go for the latter. You cannot help it, that is how your brain is wired.

If the above best describes you, you are an Adventurer.

Your biggest fear when it comes to investing (and in life) is that of being left out. You cannot stand the thought of missing out on anything, be it a party or an investment opportunity. You like to be where the action is, and your investment history bears testament.

You have a track record of putting your money in a whole range of alternative investments such as land banking, precious metals or even overseas properties. Not because you know much about the investments themselves. On the contrary, your investment knowledge as you would readily acknowledge, is rather inadequate. You invested because your friends has invited you to do so, and you cannot bear to disappoint them. Besides, the deal does sound really compelling.

If you can relate to the above, you are a Celebrity.

You are careful, methodical and analytical. At work, you could be an engineer or an accountant, a doctor or even a businessman. How well you do at work depends on how good the decisions you make, and you transfer this mindset to investing and money management.

You understand your own limitations as an investor, but yet you are quietly confident of your abilities. If you are considering an investment that is new or foreign to you, you will make an attempt to find out and learn. While you seek out advice, you do not get carried away and you are always in control of your own investing journey.

If the description fits you, you are an Individualist.

If you are none of the above, you are in denial.

Behavioural Finance

In the recent decades, behavioural finance found its way into the mainstream as human beings realised that they themselves do not make rational investing decisions all the time.

To understand this ‘new’ breed of ‘irrational’ investors, we need to recognise investors as unique and each with their own characteristics, tendencies and biases, rather blanketing the entire universe of investors as one homogeneous population. Many psychographic models were designed to achieve that aim.

Ballard, Biehl and Kaiser Model

The Bailard, Biehl and Kaiser (BB&K) model is one such instance. It measures the individual investor against two elements.

On the first aspect, the model gauges the confidence of the investor towards life in general. The confidence is transmitted in his approach towards aspects of life such as health, career and interpersonal relationships. On one end, an individual can be confident and self assured. On the other, he or she could have an anxious disposition towards life. They are often labeled as ‘worriers’.

The second aspect determines whether an individual is careful, methodical and analytical in his approach towards life, or is he more emotional, intuitive and impetuous. The former tends to employ what Daniel Kahneman terms System 2 thinking, while the latter has no qualms about relying on System 1 most of the time.

The BB&K model plots investors against these two axes. As a result, four categorisations are obtained. An individual can be confident and careful (Individualist), confident and impetuous (Adventurer), anxious and careful (Guardian) or anxious and impetuous (Celebrity). Here is what it looks like graphically.

In developing the model, the authors envisioned that it will be useful for financial advisors and investment professionals to profile clients and subsequently disburse advice accordingly. A Guardian would require a lot more reassurance while Adventurers would require constant monitoring to ensure they remain on track with their financial plan.

Personally I appreciate the simplicity and elegance of the model. I do find it a shame though, that the practical application of it has stopped at professionals and has not filtered down to the individual investor level.

Being aware of one’s strengths and weaknesses will go a long way towards better investment performance. In next week’s article I will share some tips and pitfalls for the individual profiles.